Microeconomics Midterm EXAM

Know ts

Public Good

A good that benefits many people, whether or not they paid for it, and whose benefits to any one individual do not depend on how many others also benefit.

Common Resource

A good that many people can consume, whether or not they paid for it, but whose consumption by each person reduces the amount available to other persons.

Characteristics of a good

Excludable: Only for those who pay

Non-excludable: The supplier cannot prevent the consumption of the good by people who do not pay for it.

Rival in consumption: The same unit of the good cannot be consumed by more than one person at a time.

Non-rival in consumption: If more than one person can consume the same unit of the good at the same time.

Artificially Scarce Goods: Goods that are excludable but non-rival in consumption. This means that the good is only for those who pay, but more than one person can consume the same unit of the good at the same time.

Rivalry

The property of a good whereby one person’s use diminishes other people’s use.

Tragedy of the Commons

The tragedy of the commons is a problem that occurs when individuals exploit a shared resource, causing demand to overwhelm supply and making the resource unavailable to some or all users.

Free Rider

A person who receives the benefit of a good but avoids paying for it.

Free-Rider Problem

A situation in which public goods are under-provided, or not provided at all, because individuals can consume them by paying little or nothing toward their cost.

Externalities

It is a side effect or consequence of an industrial or commercial activity that affects other parties. It could be either positive or negative. A positive externality could be education, while a negative externality could be alcohol.

Internalizing The Externality

When individuals take external costs or benefits into account. Altering incentives so that people take into account the external effects of their actions. Removing lead from the water source is an example of internalizing the externality, as are pollution control regulations.

PPC Illustrated/Principles

Be able to draw a PPC.

Principles:

• Scarcity

• Opportunity Costs

• Trade-offs

• Efficiency

What is a PPC?/Graph Explanations

A graphical representation showing all possible combinations of quantities of goods and services that can be produced using the existing resources fully and efficiently.

• Points on the curve represent an efficient use of current resources.

• Points inside the curve represent an inefficient use of current resources.

• Points outside the curve are impossible with current resources, or only possible with new resources/technology.

Economic Principles 3-7

Principle 4: People normally respond to incentives. When someone is given an opportunity to make themselves better off, they normally take it.

Principle 5: There are gains to trade. Gains could include interdependence among individuals or nations, specialization, comparative advantage, increased output, and a lack of self-sufficiency.

Principle 3: “How much” is a decision made at the margin. It could be an either-or choice, a trade-off, decisions made by the hour, or conducting a marginal analysis, which is examining the additional cost/benefit of doing “one more” of an activity.

Principle 6: Markets move towards equilibrium. An economic situation is in equilibrium when no individual would be better off doing something different.